Sell Bullish Put Spreads – At Very Least the Market Will Tread Water Into Year End

Posted 10:00 AM ET - Yesterday, the market leaked oil right from the opening bell. Once the selling momentum was established, Asset Managers pulled bids and the low from Tuesday (SPY $203.90) was breached. That was the most recent breakout and it represented technical support. The market closed near the low of the day and volume increased. The S&P 500 is up eight points before the open and I believe buyers will step in today. If we start to see a steady drift lower, we could test major horizontal support at SPY $202. That was the breakout from October. The next major support below that is SPY $199 (100-Day MA). I have about 30% of my capital allocated to December out of the money put credit spreads. I established these positions about three weeks ago and they are still profitable. Unfortunately, they are more expensive to buy back now that the stocks have drifted lower and option implied volatilities have spiked. As long as the stocks stay above technical support, I will stick with the positions. Option expiration is little more than a week away and if I can weather the next two days, they will be much easier to manage. I was shaken out of my call positions on Tuesday and I did not re-enter yesterday. When the SPY breached the low from Tuesday I sent an alert to platform subscribers telling them that I was shorting the S&P futures as an intraday hedge. The money I made shorting the futures yesterday offset the losses on my put credit spreads. I did enter new January out of the money put credit spreads on Tuesday. I am taking some heat on those positions, but I only have 10% of my capital allocated to those trades. I always make sure that there is technical support between the stock price and the short strike price. If that support fails, I will buy back the spread. I still have plenty of breathing room on most of the positions. I am in risk management mode. The only new position would be an intraday hedge using the S&P futures. If we go negative today, I will short the futures. If the market goes positive after that, I will stop out. If you do not have a futures account, you can buy in the money SPY put options. Make sure to get out before the close. I do not want to be short overnight! China will post industrial production and retail sales tomorrow. I've been pointing to this number all week and it will be pivotal. A good number will attract buyers and the soft number will spark profit-taking. I don't want to take any new positions ahead of the release. I believe stable conditions in China are the key to a year-end rally. The FOMC will release its statement next week. Most analysts believe that the phrase "considerable time" will be removed. I too believe they will remove the phrase, but they will soften the blow with other language. The Fed will remain accommodative well into 2015. Oil prices are tanking and that is affecting energy stocks. One man's loss is another man's gain. Lower oil prices will stimulate global consumption. Credit concerns could flare-up in Brazil and Russia. I'm not overly concerned with Greece since it will be bailed out by the EU, but Brazil and Russia could provide a credit shock. I don't believe this will be an issue for the next few weeks, but credit conditions need to be monitored closely. The debt ceiling will be hit today and politicians ran into a snag. It should get extended in the next few days and that will be bullish for the market. Once we get through China's numbers and the FOMC next week, the market should be able to grind higher - at very least it will tread water. The S&P 500 is up 17 points after 10 minutes of trading and it looks like the bounce will hold. I will not be adding new positions today. I am in risk management mode and I want to get past China's number tomorrow. . .

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